I worked out recently that there’s a real possibility you could double the State Pension by accumulating a pot of around £114,000 by the time you retire. That’s based on the current pension of £8,767 per year, and involves buying the top 26 shares in the FTSE 100 that were offering dividend yields of 6% or more according to AJ Bell‘s latest Dividend Dashboard.
You still need to plan how best to use it once you’ve reached retirement age – you’ll obviously want to enjoy the best quality of life you can, but it’s critically important to ensure you don’t run out of cash.
Mistake
I was shocked to read the results of the Schroders Global Investor Study 2019, which revealed that on average, the investors surveyed reckoned they could withdraw 10.3% of their total pot every year and not run out of cash.
Schroders calculated that, assuming an annual portfolio return of 4% after inflation and 1% per year in fees, the cash would run dry in just a decade at that rate – and people today, on average, are living a lot longer than that after retirement.
So how should you manage your investments to make the most of retirement? For me, it’s still going to be shares in dividend-paying FTSE 100 companies, because shares provide the best and most reliable long-term investment I know, and I’m certainly not going to take a downgrade to the couple of percent at best that I’d be likely to get from any cash-based investment.
Inflation
The ideal is perhaps to take out whatever returns you get in advance of inflation and whatever charges you have to pay, and leave the rest invested to keep up with inflation. That way, your pot will keep its value in real terms, and it can fund you for however long you live. You might actually want to use up capital too rather than die and leave the whole lot in your will, but that’s fraught with danger if you underestimate your lifespan.
What actual returns can you expect? Barclays have found that, over the long term, UK shares have returned an average of 4.9% above inflation, per year. So, after charges, we’re probably talking of approximately 4% per year that you should be able to draw down while retaining your capital value – and that’s the reasoning behind the 4% rule that’s often recommended.
Dividends
Another approach is to not worry too much about percentages, and just take out your dividends to live on, assuming that share prices themselves will appreciate sufficiently to cover inflation plus charges. I think there’s a very good chance that will succeed, and you can always adjust your withdrawals from year to year if you’re going under or over target.
And you could do especially well right now, because I think we’re in one of the best times to invest in a retirement dividend portfolio that most of us have ever seen. I’ve already spoken of the 7.8% you could get from those top dividend stocks at the moment, but even the entire Footsie (including low dividend stocks) is on for a 4.8% yield this year.
If you invest now, you’ll effectively lock in today’s yields, and help minimise your chances of running out of retirement funds.
